Malta: How STOs Are Shaping The Capital Markets

In this article, Dr Justine Scerri Herrera, who specializes in
Blockchain and Crypto (VFA Department), talks about how security
token offerings are revolutionizing the capital markets.

In the past, businesses aiming to tap into the capital markets
without raising debt could only accomplish such a vision by means
of initial public offerings (IPO) or private equity.

Nowadays, with the introduction and boom of Crypto and
Blockchain, we have been provided with a brand new and innovative
method of raising capital. How? By launching an Initial Coin
Offering (ICO) or Security Token Offering (STO) with the latter
gaining more and more popularity.

In order for token issuers to proceed with their ICO and STO
projects, soft caps must be reached, and issuers must deliver their
promises concerning the benefits and value of owning/using tokens.
They must do this by means of following a path, which is spelled
out in the Whitepaper or Prospectus paper and this must be done
within the stipulated time frames. It is crucial for those
purchasing tokens to perform due diligence on those offering the
said tokens. This should be done in the same way one would perform
background checks on companies offering equity through an IPO. This
point should be emphasized and regurgitated as much as possible
because most of the investors in the crypto space are retail and
not professional investors and most often will overlook certain
details so they will require more protection.

Arguably the most important and effective marketing tool for
token and coin issuers are Whitepapers for ICOs and Prospective
Papers for STOs.

If an issuer opts to launch their ICO or STO from a regulated
jurisdiction, such as Malta, their Whitepaper or Prospective paper
must meet regulatory requirements. This must be done in order for
the relevant regulator, in this case the MFSA, to approve and
register the papers and in this way will regulate and ensure
compliance with the activity of placing the token/coin on the
market.

The applicable legislation, which concerns the regulation of
ICOs and STOs differ in Malta, due to the island's token
classification system. For instance, the applicable legislation
that security tokens are subjected to refers to MIFID, and the EU
Prospectus Directive. Those that are pursuing offerings in such
forms must include certain components including details regarding
the token issuer and their advisory team, Wallet Security, AML
and KYC considerations, soft and hard caps, token representation
and value, etc. In this way, potential investors will be
acutely aware of what they are purchasing, thus protecting both the
investors' assets and safeguarding the integrity of the market
as a whole.

It is imperative that token issuers issue their tokens from
reputable jurisdictions. This is important due to the fact that
tokens could be listed on exchanges, in order to be traded.
Following a successful offering, issuers could list tokens on
exchanges, many of which such as Binance and Okex (who are situated
in Malta) will only list tokens which were subject to approval,
legal vetting and registration by competent authorities in
reputable jurisdictions.

Are STOs the best thing to ever happen to Capital markets?

STOs offer the exact same rights conferred with assets that are
bought and sold in the traditional financial markets. The act of
tokenizing securities, however, affords benefits which cannot be
achieved through traditional financial market channels. Tokenizing
securities introduces benefits such as: facilitating global access,
bringing liquidity to certain markets, fractional ownership and
allows for automatic settlement transactions, thereby eliminating
certain third parties and cutting costs.

STOs traded on Blockchains enable investors to partake in
trading, without middlemen, such as banks and other financial
institutions, as transactions made on a DLT are made Peer to Peer
(P2P). Fractional ownership is also facilitated as investors may
purchase fractional ownership of assets, like property. You would
like to own a villa but you cannot currently afford it? Not to
worry; you can purchase and own just a portion of it.

What issues are STOs facing?

In order to ease and complement the process of the tokenization
era, a level of sophisticated solutions is required. The necessary
infrastructure, however, including the role of custodians, is still
maturing and has not yet been developed to the advanced stage
required in order to complete the full ecosystem including areas
such as the storing of virtual assets and ensuring that the complex
high-quality smart contract considerations needed in the realm of
securities are defined.

That being said, due to the rapid rate at which different
players in the game are developing and evolving, as well as the
continuous solutions being released, it is only a matter of time
before service providers and software developers break and perfect
the code.

Another issue is that of liquidity. It may be said that STOs are
currently at the infancy stage. One of the most common assets
visualized is equity, in the form of equity tokens. We need to have
more primary market platforms in order to aid in raising funds as
well as more security token exchange platforms, which allow the
trading of such securities, replicating the same process and
methods used in the world of traditional capital markets.

The system will be fully functional once there is a sufficient
number of tokenized securities and reputable licensed operational
primary and secondary market platforms allowing for the STO market
to actually take off and boom to its potential level of a
borderless barrier to trade and liquid markets.

In conclusion, we have time and time again heard that it is
somewhat risky to buy tokens, due to the countless failing ICO
projects. I believe, however, that the reason behind these failures
is the fact that they were launched from a jurisdiction that was
not regulated. If those 90% of failing ICOs had to go through the
regulated path (Whitepaper vetting and registration) before
launching, the number would be significantly lower. Furthermore,
ICOs and STOs are two separate type of tokens which follows two
different routes and applicable laws.

Scenario: When it comes to buying shares in a company, in an
initial public offering, is there also not the chance that it may
turn out to be a bad investment? It is common knowledge that
listing an IPO has certain legal projections. That being said, if
an ICO/STO is launched from a jurisdiction that is reputable,
subject to legal requirements and approval by regulators, in
Malta's case the MFSA, investor protection and market integrity
will be offered.

It goes without saying that there are other issues and concerns,
such as token volatility and market liquidity, however, these
issues are also present in the traditional world of finance and
capital markets.

The cold, hard truth is that if an IPO, ICO or STO is opted for,
with all the aforementioned points kept in mind, it could very well
be one of the best decisions you will make.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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